Offshore insolvency petitions on the rise

The number of insolvency petition filings in offshore jurisdictions increased significantly in 2017.

The jump in petition filings was based on more activity in the British Virgin Islands and Mauritius, which offset falls in the Cayman Islands and Isle of Man, according to a report from offshore law firm Appleby.

The BVI stood out with 75 applications for a court-appointed liquidator – almost doubling the 2016 total – as the jurisdiction was home to significant insolvencies, particularly in the natural resources sector and with various Asian conglomerates.

While court filings in Cayman shrunk across several categories in 2017, scheme petition filings were marginally higher and included four schemes pertaining to the landmark Ocean Rig case, the largest ever restructuring in the Cayman Islands.

“Although the number of petition filings declined in some centers, we saw numerous complex restructuring cases in 2017, with major cross-border restructurings of oil and gas service providers in Cayman, BVI and Bermuda,” said Tony Heaver-Wren, a dispute resolution partner in Appleby’s Cayman office.

Appleby’s annual review of offshore insolvencies and restructurings in Bermuda, the British Virgin Islands, Cayman Islands, Guernsey, the Isle of Man and Mauritius noted that a total of 296 compulsory winding-up petitions were submitted to offshore courts in 2017, up 48 percent over the previous year.

Across the six offshore jurisdictions, the average conversion rate of petitions into orders was 64 percent.

The report examined notices published across four categories: compulsory winding up filings, conversion of voluntary liquidation to court supervised liquidation, schemes of arrangement and capital reduction.

The Cayman Islands recorded 57 petition filings across all categories last year. These resulted in 43 orders. The number of court filings declined in most categories except for petitions to place a company under court-supervised liquidation.

The time it takes for a petition to be converted into a court order varies widely in Cayman. On average, a court order was issued six weeks after the filing of a winding up petition, and it took eight weeks for the conclusion of a capital reduction. But in individual cases, the process can take several months.

Quite often, insolvent companies choose to first enter a liquidation by appointing a voluntary liquidator and then petitioning the court to bring the liquidation under the court’s supervision. Together with winding-up petitions, there were a total of 40 insolvency petitions filed in Cayman in 2017. These resulted in 30 court orders, roughly the same conversion rate as in previous years.

The vulnerabilities of the oil and gas sector did not result in the expected high number of insolvency filings “as cultural resistance to formal insolvency process and the ‘amend and extend’ crisis management method contributed to moderate petition numbers,” the report said.

Although commodity prices have recovered since, the weaknesses in the oil and gas sector remain, Appleby noted.

Cayman’s 2017 petition filings for schemes of arrangement included four related to the landmark Ocean Rig case alone, the largest ever restructuring in the Cayman Islands.

The restructuring reduced the net debt of the distressed offshore deepwater drilling services group by approximately US$3.25 billion and involved the provision of a new $450 million credit facility.

All four of the group’s debtors were Marshall Islands companies but unable to restructure in the jurisdiction, because it lacks a restructuring regime. Before filing the petitions for schemes of arrangement, the subsidiary companies had their center of main interest shifted to Cayman and the parent company was re-domesticated to the Cayman Islands.

The schemes were vigorously challenged on a variety of grounds, Appleby noted, but they were sanctioned by the Cayman court and recognized by the U.S. Bankruptcy Court in chapter 15 proceedings in the Southern District of New York.